C H A L L E N G E S F A C I N G C A N A D I A N A G R I C U LT U R E
Competition and Subsidies
in Global Markets
he Government of Canada and the provincial
and territorial governments are working with the
industry and interested Canadians to develop an
agricultural policy for the 21st century. The objective is for
Canada to be the world leader in food safety, innovation
and environmentally-responsible production. This proposed policy direction recognizes the increased challenges
that Canadian producers face as they work to adapt to
rapid advances in technology and compete against other
countries in an increasingly complex global food market.
T
The following is one of a series of three background briefs
on key challenges that need to be addressed in building
a stronger agriculture and agri-food sector in Canada:
• The effects of competition and subsidies in global
markets;
• Rising consumer demands for food safety, enhanced
environmental stewardship and other quality
attributes; and
• The importance of skills and knowledge in an era of
advancing science and technology.
In recent years, Canada’s agri-food exports increased
rapidly. Between 1990 and 2000, they more than doubled,
to $23.4 billion a year. Much of the growth occurred in
value-added products, which now account for the majority
of agri-food exports.
In the future, international markets will continue to be
a source of growth both for high-value products and bulk
commodities.
Given the importance of international markets to the future
growth of the sector, Canada is actively pursuing a multipronged trade policy to improve market access and to level
the playing field through the current round of World Trade
Organization (WTO) negotiations and through regional
agreements like the Free Trade Area of the Americas (FTAA).
At the WTO, Canada is pushing for real and substantial market access improvements, the elimination of export subsidies
and the maximum possible reduction of trade-distorting
domestic support.
Total Canadian Agri-Food Exports
$ Billion
Opportunity for growth in
world markets
Trade is critical to Canada’s agri-food sector
Canada is a major agricultural producer with a relatively
small population. As a result, we export almost half of
our farm products, either directly as primary products or
indirectly as value-added processed products. Because of
the amount of exports, the success of the agri-food sector
depends, in large part, on international markets. But
competition in these markets is increasing, which has implications for both the sector and Canadian agricultural policy.
25
20
Consumer-oriented
15
10
Intermediate (processed)
5
Bulk
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Note: As examples of the export categories, wheat is a bulk product; flour is an
intermediate (processed) product; and frozen pastries are a consumer-oriented product.
In recent years market forces have pushed
prices down
Challenge of increased
competition in world markets
Increased international competition
drives prices down
Technological change, ranging from increased mechanization of agriculture to advances in biotechnology, has been
affecting agriculture for decades. This change has increased
the efficiency of world agricultural production and has
allowed both existing farm operations to improve their yields
and new operations to begin production in areas previously
thought to be unsuitable for farming. As a result, technological change has increased productivity, reduced production
costs, and increased total production.
One of the most significant effects of technological change
and increased competition is the long-term decline in most
commodity prices. For example, in the grains and oilseeds
sector, the price of wheat (price of #1 CWRS adjusted for
inflation) has fallen at a significant pace over several
decades as indicated in the following graph.
More recently, the decline in wheat prices has also
been driven by some short-term factors including the
economic collapse in Southeast Asia and the former
Soviet states which reduced world demand over the period
1995–2000. In addition, policy reforms in China have
made it largely self-sufficient in grains, reversing its role
as a major importer of grains.
International comparison of the costs of production
for oilseeds, 1999
$Can/cwt
20
15
10
5
0
Wheat price adjusted for inflation
Brazil
Argentina
Soybeans Soybeans
Canada
Canola
USA
Germany
Soybeans Canola
$US/Tonne (1995 Base-Year)
Level of government support for oilseeds
(% of value of production)
5-10%
0-2%
8%
23%
28%
700
600
Growth in oilseed output
(% change from 1992–1996 to 1997–2001)
37%
52%
27%
24%
24%
500
400
Note: Cost of production is expressed in canola equivalent.
Sources: International Farm Comparison Network (Germany), Organization for Economic
Co-operation and Development, and Agriculture and Agri-Food Canada.
300
200
100
0
1970
1974
1978
1982
1986
1990
Source: AAFC — prices deflated by GDP price index.
1994
1998
2002
Competition increasing from low-cost
countries, with little government support
Increasing world supply has added to the pressure on prices.
Low-cost producers such as Brazil and Argentina have
significantly increased production in the past ten years.
These countries have been able to use their low costs to
increase their world market share with relatively low levels of
government support. In fact, recent production data indicate
that Brazil and Argentina are now producing almost as much
soybeans as the United States.
Subsidies also play a role in driving grain
prices down
Many observers point to high levels of subsidies in the United
States and the European Union as the main cause of low
grain prices in Canada. However, analysis has shown that the
impact of these subsidies on grain prices is much less than
many suggest. In fact, the complete removal of all US and EU
subsidies would reverse about one quarter of the decline in
grain prices since the mid-1990s. Rather, most of the decline
in grain prices is due to the dynamics of the world markets
beyond the influence of government subsidies.
In the face of declining prices, the challenge for Canadian
producers is to adopt new technologies, to innovate and
to produce value-added products to remain ahead of
international competitors.
Support programs—some
drawbacks
Program payments have unintended
consequences
Many countries have tried to insulate their agricultural sectors
from the pressures of increased international competition
and declining world prices with farm support programs. But
evidence is growing in many countries that traditional farm
support programs can have serious unintended consequences
that undermine their effectiveness in building a stronger
agriculture sector. In some cases, these programs can actually
increase the dependency of the producers on government
support and undermine their commercial viability.
How serious the unintended consequences are depends on the
exact structure of the farm support. Recent studies from the
Organization for Economic Co-operation and Development
C H A L L E N G E S FA C I N G C A N A D I A N A G R I C U LT U R E
(OECD) and others show that traditional programs like
input subsidies, price supports and tariff barriers have serious
unintended consequences as they distort production and
trade decisions and often increase costs. As a result, a high
proportion of the benefits can fall to non-farmers. In addition, these programs can have unintended costs in other
important areas, such as the environment, by creating an
adverse incentive for intensive production practices or by
expanding production onto marginal lands.
Program payments have evolved
in recent years…
Agriculture policies in developed countries have evolved in
recent years, in part, to try to reduce these unintended consequences. Canada moved from commodity-specific support to
a whole-farm approach. The United States moved to decouple
its assistance from current production decisions in its agriculture reforms of the mid-1990s. The European Union also
moved away from market-price support and reduced its use
of highly distorting export subsidies.
With these moves, there has been some progress in reducing
production and trade-distorting farm support policies, but
only to a limited degree. The United States has increased
support levels in recent years and increased the use of traditional programs that cause some of the largest distortions in
markets. In the European Union, levels of support still
remain high.
…but they can still undermine diversification
and increase costs
Even with the recent improvements, farm support programs
in the major developed countries still have significant adverse
effects that can make them counterproductive to building a
strong agricultural sector.
The conditions associated with farm support programs,
such as price supports, can undermine farmers’ incentives to
produce for the market and thereby reduce diversification.
They can also raise costs, particularly if they get capitalized
in land values. For example, a recent USDA study found that
US support payments increased land values by US$270 billion.
In Canada, 40 per cent of farmers rent land, and for them,
an increase in support payments would quickly translate into
higher rental costs and the benefit of the support program
would be lost. Also, as a result of higher land values, many
farmers—particularly new farmers—must assume larger
debt loads to begin operating.
• Farm support programs cannot insulate producers
from the pressures of world markets. They have serious
unintended consequences that reduce the commercial
viability of many producers and that increase their
dependency on government support.
They displace market income
Bibliography
The combined effect of reduced diversification and increased
costs is that support programs squeeze the operating profits
of farms and effectively displace market income of producers.
A recent OECD study shows that it can take up to four dollars
of support payments from taxpayers to increase the net
income of a producer by one dollar—a poor return for
the public transfers to the sector. As a result, the benefits of
support payments could be dissipated, commercial viability
for producers would be reduced, and the dependency on
government payments increased.
Agriculture and Agri-Food Canada. 2002. Report of the Federal/ Provincial
Safety Net Working Group. www.agr.gc.ca/ finances_e.phtml.
Summary
• World markets are critical for the future growth and
success of Canada’s agricultural sector.
• Rapid technological change and increased international
competition are driving down commodity prices.
• The difficulties with subsidies suggest that the way to
ensure a strong sustainable agricultural sector is by
focusing on commercial success through the market.
AAFC. Agri-Food Trade Network database.
Dewbre, J. et al. 2001. Relative Supply Effects on OECD Countries. AAEA
Conference in Chicago.
Möller, C. et al. 2001. Ein Vergleich der weltweit wichtgsten
Anbaouregeionen fur Ölsaaten, Institut für Betriebswirtschaft. Working
Paper of International Farm Comparison Network. Germany.
Organisation for Economic Co-operation and Development (OECD). 2001.
Market Effects of Crop Support Measures. Paris.
OECD. Agricultural Policies in OECD Countries: Monitoring and
Evaluation. Paris.
OECD. The Agricultural Outlook Database. Paris.
Rosegrant, M. et al. 2001. 2020 Global Food Outlook: Trends,
Alternatives and Choices. International Food Policy Research Institute,
Washington.
Statistics Canada. CANSIM database.
• Low-cost producers are increasing their market share
with relatively low levels of government support.
U.S. Department of Agriculture (USDA). 2001. Food and Agricultural
Policy: Taking Stock for a New Century, September 2001. Washington.
• While foreign subsidies have some effect on Canadian
grain and oilseed prices, technological change and
increased world competition will continue to lower
world commodity prices, regardless of the direction of
government subsidies.
USDA. 2001 “Government payments to farmers contribute to rising land
values” in Agricultural Outlook, June. Washington.
USDA. Production, Supply, Distribution (PSD) Database, Economic
Research Service. www.ers.usda.gov.